Did 401(k) Reform Help?

Five years after the sweeping changes, participation is up. So why aren't workers better prepared?

By

JilianMincer

Five years after sweeping legislation altered the landscape for retirement savers, more workers are participating in 401(k)s and other workplace-savings plans. Success? Not so fast, critics say: Workers aren't necessarily better prepared for retirement than they were back in 2006.

Controversial at the time, a small provision in the Pension Protection Act of 2006 allowed companies to "auto-enroll" employees in a 401(k) plan – basically, to get them started saving unless they actively declined. The goal was to use employees' inertia in their favor, and according to some data, that's worked: 82% of employees in companies with auto-enrollment participate in their 401(k) plan, compared to just 56% of workers at firms without the program, according to data from Fidelity Investments. Almost 60% of large companies now use the feature – more than double the number that did before the legislation was passed.

And yet, most investors are still woefully behind when it comes to retirement savings. In 2009, the average 401(k) was about $110,000, according to the most recent available data from the Employee Benefit Research Institute – down from $121,000 in 2006. Financial planners and advisers agree that savings would likely only generate income of $4,000 to $6,000 a year in retirement – not enough for most to continue their pre-retirement lifestyles. More than half of workers are in even worse financial shape, with less than $25,000 saved, according to a March EBRI survey.

Part of the problem, say retirement experts, is that auto-enrollment programs typically only enlist new workers, meaning large parts of the existing workforces still aren't participating. Only about 20% of companies automatically enroll existing employees, says Marina Edwards, senior retirement consultant Towers Watson. Most auto-enroll plans also begin with a savings rate of 3% -- way too low for most people, says Stuart Ritter, a financial adviser at T. Rowe Price. "Auto enroll is a step in the right direction, but we're not there yet because we're not getting people to save enough," says Pam Hess, director of retirement research at Aon Hewitt. Indeed, auto-enrolled people on average sock away less than those who enroll on their own. Consider: Participants in plans with 401(k) plans offered by Vanguard with voluntary enrollment were saving an average of 7.5% in 2009, compared to just 6.1% for those in automatically enrolled plans.

Some experts are also critical of the investment funds that are selected for these passive investors. Some 90% of plans put new investors in target-date funds – premixed portfolios of stocks and bonds that are designed to get more conservative as a projected retirement (or target) date gets closer. But these funds "remain controversial," says Jack VanDerhei, research director at the nonprofit Employee Benefit Research Institute in Washington, D.C. Because of the market exposure, there is a good chance that in some years investors will lose money – a risk that many unwitting investors might not be prepared for, says Steve Johnson, a financial adviser with Raymond James Financial Services. During and after the 2008 market crash, some of the funds faced particularly heavy criticism for double-digit losses, including funds held by people hoping to retire in the next few years.

For their part, the fund companies defended the portfolios at the time as appropriate for savers planning for what could be 30 years of retirement or more. And the Department of Labor deliberately excluded lower-risk, lower-return investments, like money market funds or stable value funds, from its list of acceptable default options, favoring funds with stock market exposure instead.

For investors to make the most of their 401(k) plans, financial advisers recommend that clients aim for putting away 15% each month, including the company match. Ritter of T. Rowe advises people to start by trying to save that amount for three months, and only lowering the rate if it becomes too difficult (increase the rate again, he says, if you receive a raise). "The longer it takes you to get to the 15%, the more you'll have to save later," he says. "I think we underestimate our own adaptability."

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